Across the region, discount carriers have placed orders over the past two years for at least $50 billion worth of aircraft, taking new Boeing and Airbus jets to serve dozens of fresh routes and replace their fleets. They are betting the region's expanding middle class will demand more and more frequent air travel for years to come.

Many of those carriers are making the wrong decisions by trying to grow market share without anticipating pressure on profit margins, DVB Bank SE's (>> DVB Bank SE) Bertrand Grabowski, who heads the German bank's aviation and land transport finance divisions, told Reuters in an interview.

"I think individually for most of these airlines, the peak is over and they need to be more frugal in terms of capacity growth, otherwise they are going to kill themselves in terms of profitability," said Grabowski, who has worked in aviation banking for around three decades.

A glut of new capacity will force airlines to ply some less profitable routes, their margins.

Budget carriers including Air Asia Bhd (>> AirAsia Berhad), privately-held Lion Air, Cebu Air Inc (>> Cebu Air Inc) and Tiger Airways Holdings Ltd (>> Tiger Airways Holdings Limited) have 700-plus new planes on order, he said.

"Our opinion at DVB is that those book orders are far too big," said London-based Grabowski, who leads the bank in deals such as financing several aircraft for Lion Air.

Airbus (>> EADS) and Boeing Co (>> The Boeing Company) have both issued brisk demand forecasts for the next 20 years, predicting 4 trillion dollars of aircraft deliveries, mainly on the back of emerging markets led by Asia. The bulk of that money will come from banks such as DVB, or leasing companies.

"Everybody thinks that not only the market will grow, which is a legitimate assumption, but 'my share will also grow,'" Grabowski said. "And 'by the way, if the guy next door grows, I need to make sure that I have the capacity to fight my market share,'" he said.

AirAsia and Cebu were unable to provide any immediate comment for this report, while Lion Air and Tiger could not be reached for comment.

Lion Air has an advantage over rivals because it already controls about half of Indonesia's domestic market, which has much further to expand, Grabowski said.

Airlines and their suppliers alike have staked much on air travel in a region where passenger growth outpaces that of developed nations. The world's two largest planemakers believe that about two thirds of new aircraft will be sold in the Asia-Pacific region over the next two decades.

TOO MANY ORDERS

Grabowski, speaking ahead of a key aircraft finance industry gathering in Dublin this week, thinks many of those new orders will prove to be too optimistic.

"I would not be shocked if from 700 for those carriers, the orders will go down to 400, 450. There could be cancellations, there could be deferrals and this will happen, almost certainly," he said.

An analyst at the Centre for Asia Pacific Aviation said since the deliveries for aircraft were spread across many years, markets would be able to absorb the new capacity.

"In some markets, yes, the competition will be intense and that could have an impact on yields, leading to consolidation, likely impacting the smaller players rather than the big powerful groups," said Brendan Sobie, chief analyst at the industry consultancy.

"But generally given the economic conditions in the region the capacity can be absorbed and the outlook is bright for LCCs (low cost carriers)," he said.

Airlines have the flexibility to re-schedule deliveries, or enter into sale-and-lease back of their fleet. They generally pay for aircraft on delivery, not when they order them.

In February 2012, Lion Air confirmed a provisional record order for 230 Boeing aircraft taking the carrier's order book to more than 400 planes. Delivery of the planes will be in 2017-25.

Tony Fernandes, Group Chief Executive of AirAsia, believes Southeast Asia is underserved, and has previously said his firm would defend its margins.

As of November, AirAsia Group had a total fleet of 112 A320 jets and expected 266 more aircraft to be delivered up to 2026. Last December, it confirmed a $9.4 billion order for 100 more Airbus jets, making it the European planemaker's largest airline customer by number of planes ordered.

(Editing by Daniel Magnowski)

By Anshuman Daga